A non-profit organisation’s primary objective is to fulfill a mission. In the business world, a for-profit enterprise is ultimately concerned with making a profit in order to provide a return to the owners’ investment. The for-profit entity is committed to answering to its stockholders, while the non-profit organization’s commitment is to its mission and its board. A non-profit’s bookkeeping requirements are distinctive because of its tax-exempt status and its reliance on the public trust. This makes getting the right bookkeeping software that meet these specific requirements a critical organisational decision. In financial operations however, a non-profit organisation is very similar to a for-profit enterprise. All organisations need to be financially healthy to function effectively. For-profit firms seek to maximise their net profits. Non-profit organisations seek to minimise or eliminate any operating deficits, because they cannot fulfil their mission if they have inadequate resources. In reality, a non-profit organisation uses profits to provide resources for future periods.
Bookkeeping for Non-profits
Whether non-profit, or for-profit, the primary goal of bookkeeping is the same; i.e., to capture each transaction one time in a way that is fully documented, completely traceable, and fully usable by every person within and outside the organisation who has a stake in the organisation. Lets breakdown the goals into various components
Capture Each Transaction
Bookkeeping is all about recording monetary transactions correctly. As the bookkeeper, it is important to have a software in place that not only records a transaction; but you need a software that assists in recording all transactions. A missing transaction is a bigger problem than an incorrectly recorded transaction.
Non-profits should preferably deal with a transaction only once, recording everything you need at that moment. Remember that there are many potential users of the information non-profits are gathering; a potential bookkeeping software should be designed with each of those potential users in mind.
Cash Flow Management
This is a vital function, and an organization needs precise information about cash, accounts receivable and accounts payable in order to do it correctly. Most organisations that fail (both non-profit and for-profit) fail because of inadequate cash flow. Even when the organisation is making additional revenue over expenses, cash flow can sometimes be inadequate. Timing is the key to excellent cash flow management. Payroll is often disbursed every month; some vendors have very short payments terms, yet some funding sources only send in their cheques every few weeks. Without ample cash flow management, the organisation could run out of cash, despite a financial statement showing an increase in net assets.
Each transaction should be backed up by appropriate information. The organisation’s internal control system will specify the details of the documentation, but you should be satisfied that someone looking at the transaction at a later date could see what happened, and when it happened without relying on anyone’s recollection.
Revenue and Expenses
A non-profit organisation’s core functions of revenue and expenses are different of a for-profit business. The revenue sources for a non-profit organisation comprise investment income and proceeds from fundraising events, program fees, sales income, donations membership dues and more. The expenses incurred by a non-profit include employee salaries, financial services, fundraising expenses and other miscellaneous expenses like postage, travel and rent. This fundamental difference requires non-profits to document charitable contributions as permanently restricted assets and not as income.
While transactions are documented, both manually and electronically, non-profits need a method to trace their way back to the initial entry. Every entry in the general ledger and every amount on a financial statement mean something. The entry usually represents a number of transactions; non-profits need to be able to trace and verify individual transactions that make up the total.
Every non-profit organisation is unique in its own way, but the one thing that have in common is the need for a well-designed, accurately maintained accounting information system. If you are in the market for an accounting system to meet your non-profit organisation’s needs, try Nomisma Solution’s free trial; a great all-in-one bookkeeping solution for non-profit organisations.